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Why BC Hydro always overestimates future power demand: Economist

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Posted January 20, 2015 by Erik Andersen in Economics
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Why BC Hydro always overestimates future power demand- Economist

What BC Hydro says about its own work clearly establishes the forecast as a foundation document for future planning for new generation and distribution investments:

Load forecasting is central to BC Hydro’s long-term planning, medium-term investment, and short-term operational and forecasting activities. (1)

Because of this importance, the forecast needs to be as accurate as possible and that is where matters get interesting.

Getting the numbers wrong

An illustration of getting the numbers wrong can be seen on page 21 of the 2012 Load Forecast: “Comparison of 2011 and 2012 Forecasts”. There is a forecasting error of about 4% in each year for the period 2013 through to 2032. BC Hydro discovered that it had projected total demand numbers in 2011 that it subsequently reduced 12 months later, by about 4% for each of the following 20 years.

Case in point for year 2017; the 2011 forecasted demand value was 4,219 GWhrs more than was presented in Forecast Year 2012, one year later. This amount of error is the equivalence of the projected annual output of the proposed Site C dam or $9 billion of borrowed money.

This is not a one-off event, just part of a pattern across the past decade. For example, from the 2007 Forecast, the demand value for 2012 was projected to be 57,201 GWhrs for the year. Actual reported sales, in GWhrs (2), were 52,197; 5,004 less than forecasted in 2007. This was a forecasting error of 9% for only 5 years on from its presentation.

Industrial power demand on the decline

By the 2012 Forecast BC Hydro was beginning to recognize that its previously held opinion of future demand was wrong. For example:

The residential forecast is below last year’s forecast for all years of the forecast due to lower housing starts and account projections, and lower loads anticipated from EVs…Industrial sales are projected to be lower than last year’s forecast.(3)

This was a very belated recognition of a condition that was evident starting about 2007. Sales to large industrial customers had been steady at about 16,000 GWhrs per year in the first half of the decade, but certainly not increasing and thereby providing no supportive evidence of growth of demand for this customer category.

To no one’s surprise 2008 sales to large industrials was the start of a downward trend. In 2009 sales were 14,303 GWhrs, in 2010 13,020 GWhrs, where they have flat-lined right up to March of 2014 (last report available).

Commercial and light industrial too…

Regarding the sales outlook for the customer category “commercial and light industrial”, BC Hydro wrote: “Total commercial forecast is below the 2011 Forecast in the initial period of the forecast; this primarily reflects lower commercial distribution sales driven by slower growing economic drivers.”

What gives?

Now, dear reader, you might rightly ask yourself why has and does BC Hydro gets its forecasting wrong. The answer or answers are not so easy to discern but they are most likely because of using model entry data of poor quality, thereby compromising projections. For residential customers, the “forecast is the product of accounts and use per account. The account forecast is driven by projections of regional housing starts.”

Graph 1

For commercial customers, “The key drivers of these end-use models are regional economic variables (i.e., commercial output [Gross Domestic Product (GDP)]), employment, retail sales, and non-economic variables such as weather and average stock efficiency of the various end uses of electricity.” For large industrial customers:

GDP growth projections are used to develop the forecast. (4)

Political science

Common to all customer categories is the forecast for Gross Domestic Product (GDP). This is where BC Hydro loses control by taking the GDP outlook from the BC Ministry of Finance. The Government’s outlook on GDP has been consistently bullish, simply because its preparation has too large a political dimension. Government budget presentations universally project an increase for year two greater than for the upcoming year. To do otherwise would be a career-ending action.

Rising consumer costs = more conservation

As to the residential forecast it focuses on the outlook for meter installations. People are the consumers of electricity not addresses of meters. It was clear from the evidence presented at the hearing on the installation of the “smart meter” that one customer sometimes had multiple meters. In urban areas, where real estate prices have increased dramatically, population densification has been a trend, meaning that more than two people can often be behind one meter.

BC Hydro does prepare their forecasts being mindful of price elasticity. Yet resistance to higher rates, and ones destined to increase at accelerating rates, has possibly not been adequately appreciated by BC Hydro.

An additional driver used by BC Hydro when preparing the forecast of residential demand is “personal income”. There are two factors that degrade the use of personal income data. The first is the trend of exporting high-income, value-added jobs from the province. The second is the progressive increase in service fees and rates that shrink disposable incomes. Decreasing ridership on BC ferries is a good example of this dynamic.

Need for Site C unproven

There is no argument that BC Hydro has a history of wrongly exaggerating the outlook for electricity demand. This could be because some of the input data for its modeling are politically contaminated. The construction of Site C, a $9 billion matter using borrowed money, is not even close to having the support of a believable forecast of demand. The sloppy business case for this dam is a disgrace and an insult to the citizens of BC.

(1) BC Hydro Electric Load Forecast: 2012; page 7
(2) BC Hydro Annual Report for Fiscal 2012
(3) BC Hydro 2012 Load Forecast; page 11
(4) Ibid; page 8

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About the Author

Erik Andersen

Erik Andersen is a retired economist who practiced as a transportation economist with the Canadian Transport Commission; with Airports Branch, Transport Canada; with ICAO and at private corporations such as Pacific Western Airlines. More recently he has been lobbying Federal Ministers to reform the way Canada Pension Plan Investment Board invests pension funds. He has been using his talents of late to expose the calamitous fiscal impact of private power companies on British Columbians.

9 Comments


  1.  
    Alec C

    Crown Corp overestimating demand forecasts so a pet project gets the green light? West coast or East coast in Canada this is an epidemic as NLs Nalcor also has questionable methodology for their pet project Muskrat Falls.

    http://www.mun.ca/harriscentre/policy/memorialpresents/2012a/lower_chuchill_jan_2012.pdf This presentation was made by the go-to economist for the current administration in NL.
    Slide 10 has the energy forecast for NL (Island)
    7,600 GWH 2010 10,500 GWH 2041 12,000 GWH 2067: 58% demand increase by 2067, 38% increase by 2041 or 1% demand increase annually.

    NLs economy has taken a giant hit with oil prices dropping, expansion projects on exiting fields put off from 2017 to 2020, mines are closing down in Labrador. Assumption #1) Nalcor’s industrial demand hasn’t been updated since 2010 Assumption #2) Huge rate increase (minimum 4 cents kWh) for customers doesn’t affect residential demand forecasts Assumption #3) The number of customers will be the same in the future – NLs population set to decline 10% over the next 25 years.

    Erik Andersen please give the link provide a look-see because NL requires far more oversight on the economics of Muskrat Falls.




  2.  
    John's Aghast

    Speaking of (not so) Smart Meters, mine are manually read (I can tell by the footprints in the snow). Apparently they do not work in ‘Rural Areas’. I live 3 km outside of town.
    Great idea though.




  3.  
    mooney

    I think the people of BC have to disabuse themselves of any notion that our Crown Corporation is being operated in the Public interest.

    The formula we are seeing here plays out in the third world regularly. Big money bankrolls/corrupts a government, self serving bureaucrats go along or get fired and for all intents and purposes the profits are siphoned off, leaving the pubic with huge debt. And skyrocketing prices.

    The best thing that could happen for the public would be Hydro and the Liberals subjected to a very public forensic audit, forced on them by petition/written complaints made to the police and signed by five or ten thousand outraged British Colombians. Then we’d see who’s drinking who’s bathwater.




  4.  
    R.Dale

    Look back to when Ex premier Gordon Campbell and his Liberal party who
    -bypassed the BC Public Utilities Commision(by preventing and locking out any input/investigation by the BC.PUC re IPP companies.

    -Deactivated and shut down Burrard Thermal power generation facility(even as a back up power source)

    -signed ironclad contracts with IPP locking in BC consumers to buy their produced IPP power at 30% higher rates than what consumers pay to BC Hydro –
    -advocated Hydro to sell the excess power at reduced rates lower than the IPP.
    Hell of a way to serve and protect the rights for BC consumers.
    Why would BC consumers pay 30% more for power when we could get it 30% cheaper?You know the answer to this one It spells G.Ca**bell

    -Additionally What does the IPP Independent power producers now pay BC for the use of our BC waters use in the generation of Private Hydro power?
    That info seems to be missing and unavailable.
    In my personnel opinion it all started with Gordon Campbell and we only have ourselves to blame for voting the Lie Berals back in to power.




    •  
      scotty on denman

      IPPs are as varied as the rivers they ruin. The worst economics reported have been several hundred percent more expensive electricity than BC Hydro can produce for itself. This also reflects the untimely availability of IPP power, and its ephemeral nature. There never was any way this approach could compete with BC Hydro’s traditional power generation—but what better way to bankrupt the publicly owned institution so’s to sell it for pennies on the dollar to insider friends of BC Liberals?




  5.  
    randhadland

    I think the problem arises from a basic misapplication of technique. Hydro claims to be forecasting but what they are really doing is backcasting. It’s a process by which you look at where you want to go and how you want to get there, then you, or Hydro in this case, assemble the arguments and data needed to justify your goal. It is how Hydro personnel gave WAC Bennett the justification for building the dams in the sixties.

    If we assume unlimited growth, if we assume there is no inclination to use electricity wisely, If we assume that industrial users can be subsidized by the loss of river valleys, then we can build dam after dam. The cost of the borrowed money gets dumped on the future, the cost of lost valleys get dumped on First Nations, farmers, and all residents of BC. Then some short-sighted fool gets to put their name on a white elephant.




  6.  
    Hugh

    First they overestimate future demand. Then they say new demand has to be met by BC Hydro buying power from IPPs (and/or building Site C, at a public cost of $9+ billion).

    Then they say BC Hydro can’t use Burrard Thermal. And most power can’t be imported, and has to be clean and renewable.

    Note how it all benefits the run-of-river and wind power IPP people, who apparently have been writing the policy.

    Then there’s the idiotic “we need the GDP to grow every year, indefinitely” idea. Which would make some sense if the Earth was infinite. Which it’s not.




  7.  
    nonconfidencevote

    I’m not sure what makes me angrier.
    The obvious blatant political interferance with BC Hydro’s mandate to provide adequate power to the province as economically as possible (when will the 1 billion dollar “smart meters” be paid off?)
    OR the lack of spines in the upper echelons of BC Hydro who sit like the proverbial 3 monkeys who “See”, “Hear” or “Speak” no evil because they are more worried about their jobs than what is good for the taxpayers of this Province.
    Perhaps we should start rewarding whistle blowers financially from the money saved…..





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